Judgment in Managerial Decision Making
Humans are not perfect decision makers. Not only are we not perfect, but we depart from perfection or rationality in systematic and predictable ways. The modern world is a refereed as VUCA, VUCA is an acronym – first used in 1987, drawing on the leadership theories of Warren Bennis and Burt Nanus – to describe or to reflect on the volatility, uncertainty, complexity and ambiguity of general conditions and situations. VUCA conflates four distinct types of challenges that demand four distinct types of responses.
VOLATILITY , We live in a world that’s constantly
changing, becoming more unstable each day, where changes big and small are
becoming more unpredictable – and they’re getting more and more dramatic and
happening faster and faster. As events unfold in completely unexpected ways,
it’s becoming impossible to determine cause and effect.
UNCERTAINTY, It’s becoming more difficult to
anticipate events or predict how they’ll unfold; historical forecasts and past
experiences are losing their relevance and are rarely applicable as a basis for
predicting the shape of things to come. It’s becoming nearly impossible to plan
for investment, development, and growth as it becomes increasingly uncertain
where the route is heading.
COMPLEXITY, Our modern world is more complex than
ever. What are the reasons? What are the effects? – Problems and their
repercussions are more multi-layered, harder to understand. The different
layers intermingle, making it impossible to get an overview of how things are
related. Decisions are reduced to a tangled mesh of reaction and
counter-reaction – and choosing the single correct path is almost impossible.
AMBIGUITY, “One size fits all” and “best practice”
have been relegated to yesterday – in today’s world it’s rare for things to be
completely clear or precisely determinable. Not everything is black and white –
grey is also an option. The demands on modern organizations and management are
more contradictory and paradoxical than ever, challenging our personal value
systems to the core. In a world where the “what” takes a back seat to the
“why?” and the “how?”, making decisions requires courage, awareness, and a
willingness to make mistakes.
Furthermore, the number of people, the amount of knowledge,
and the degree of complexity are all expanding rapidly. Despite the
sophistication of our corporations and the speed of our technological
development, the capabilities of the human brain have not changed dramatically
in the last ten thousand years. Yet, individuals rely on rules of thumb, or
heuristics, to lessen the information-processing demands of
making decisions. Heuristics reduce the effort people must put into making
decisions by allowing them to examine fewer pieces of information, simplify the
weights of different information, process less information, and consider fewer
alternatives in making decisions. By providing managers with efficient ways to
deal with complex problems, heuristics frequently produce effective decisions.
However, heuristics also can lead managers to make systematically biased
judgments. Biases result when an individual inappropriately applies a
heuristic.
The understanding of these systematic and predictable
departures is core to the field of judgment and decision making. By understanding
these limitations, we can also identify strategies for making better and more effective
decisions.
Here we can understand the systematic biases that affect our
judgment and decision making by learning this managerial topic, terms and
definitions.
Cognitive biases
Cognitive bias
A cognitive bias is a systematic pattern of deviation from
norm or rationality in judgment. Individuals create their own "subjective
reality" from their perception of the input. An individual's construction
of reality, not the objective input, may dictate their behavior in the world.
Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate
judgment, illogical interpretation, or what is broadly called irrationality.
Some cognitive biases are presumably adaptive. Cognitive
biases may lead to more effective actions in a given context. Furthermore,
allowing cognitive biases enables faster decisions which can be desirable when
timeliness is more valuable than accuracy, as illustrated in heuristics. Other
cognitive biases are a "by-product" of human processing limitations, resulting
from a lack of appropriate mental mechanisms (bounded rationality), impact of
individual's constitution and biological state (see embodied cognition), or
simply from a limited capacity for information processing. Although this field
of research overwhelmingly involves human subjects, some findings that demonstrate
bias have been found in non-human animals as well.
Explanations include information-processing rules (i.e.,
mental shortcuts), called heuristics, that the brain uses to produce decisions
or judgments. Biases have a variety of forms and appear as Cognitive
("cold") bias, such as mental noise, or motivational
("hot") bias, such as when beliefs are distorted by wishful thinking.
List of cognitive biases
-
Abilene paradox- In
the Abilene paradox, a group of people collectively decide on a course of action
that is counter to the preferences of many or all of the individuals in the
group. It involves a common breakdown of group communication in which each
member mistakenly believes that their own preferences are counter to the
group's and, therefore, does not raise objections. A common phrase relating to
the Abilene paradox is a desire to not "rock the boat". This differs
from groupthink in that the Abilene paradox is characterized by an inability to
manage agreement.
-
Agent detection: The
inclination to presume the purposeful intervention of a sentient or intelligent
agent.
-
Ambiguity effect: The
tendency to avoid options for which the probability of a favorable outcome is
unknown.
-
Anchoring or focalism:
The tendency to rely too heavily, or "anchor", on one trait or piece
of information when making decisions (usually the first piece of information
acquired on that subject).
-
Anthropocentric thinking:
The tendency to use human analogies as a basis for reasoning about other, less
familiar, biological phenomena.
-
Anthropomorphism or
personification: The tendency to characterize animals, objects, and
abstract concepts as possessing human-like traits, emotions, and intentions.
The opposite bias, of not attributing feelings or thoughts to another person,
is dehumanised perception, a type of objectification.
-
Attentional bias: The
tendency of perception to be affected by recurring thoughts.
-
Attribute substitution: Occurs
when a judgment has to be made (of a target attribute) that is computationally
complex, and instead a more easily calculated heuristic attribute is
substituted. This substitution is thought of as taking place in the automatic
intuitive judgment system, rather than the more self-aware reflective system.
-
Automation bias: The
tendency to depend excessively on automated systems which can lead to erroneous
automated information overriding correct decisions.
-
Availability heuristic:
The tendency to overestimate the likelihood of events with greater
"availability" in memory, which can be influenced by how recent the
memories are or how unusual or emotionally charged they may be.
-
Backfire effect: The
reaction to disconfirming evidence by strengthening one's previous beliefs.
Note: the existence of this bias as a widespread phenomenon has been disputed
in empirical studies.
-
Base rate fallacy or
Base rate neglect: The tendency to ignore general information and focus on
information only pertaining to the specific case, even when the general
information is more important.
-
Belief bias: An
effect where someone's evaluation of the logical strength of an argument is
biased by the believability of the conclusion.
-
Berkson's paradox: The
tendency to misinterpret statistical experiments involving conditional
probabilities.
-
Bystander effect, or Bystander
apathy: The bystander effect, or bystander apathy, is a social
psychological theory that states that individuals are less likely to offer help
to a victim when there are other people present.
-
Clustering illusion:
The tendency to overestimate the importance of small runs, streaks, or clusters
in large samples of random data (that is, seeing phantom patterns).
-
Compassion fade: The
predisposition to behave more compassionately towards a small number of
identifiable victims than to a large number of anonymous ones.
-
Confirmation bias: The
tendency to search for, interpret, focus on and remember information in a way
that confirms one's preconceptions.
-
Congruence bias: The
tendency to test hypotheses exclusively through direct testing, instead of
testing possible alternative hypotheses.
-
Conjunction fallacy:
The tendency to assume that specific conditions are more probable than a more
general version of those same conditions. For example, subjects in one
experiment perceived the probability of a woman being both a bank teller and a
feminist as more likely than the probability of her being a bank teller
-
Conservatism bias: The
tendency to revise one's belief insufficiently when presented with new evidence.
-
Continued influence
effect: The tendency to believe previously learned misinformation even
after it has been corrected. Misinformation can still influence inferences one
generates after a correction has occurred. cf. Backfire effect.
-
Contrast effect: The
enhancement or reduction of a certain stimulus' perception when compared with a
recently observed, contrasting object.
-
Curse of knowledge: When
better-informed people find it extremely difficult to think about problems from
the perspective of lesser-informed people.
-
Declinism: The
predisposition to view the past favorably (rosy retrospection)
and future negatively.
-
Decoy effect: Preferences
for either option A or B change in favor of option B when option C is
presented, which is completely dominated by option B (inferior in all respects)
and partially dominated by option A.
-
Default effect: When
given a choice between several options, the tendency to favor the default one.
-
Denomination effect:
The tendency to spend more money when it is denominated in small amounts (e.g.,
coins) rather than large amounts (e.g., bills).
-
Disposition effect: The
tendency to sell an asset that has accumulated in value and resist selling an
asset that has declined in value.
-
Distinction bias: The
tendency to view two options as more dissimilar when evaluating them
simultaneously than when evaluating them separately.
-
Dread aversion: Just
as losses yield double the emotional impact of gains, dread yields double the
emotional impact of savouring.
-
Dunning–Kruger effect:
The tendency for unskilled individuals to overestimate their own ability and
the tendency for experts to underestimate their own ability.
-
Duration neglect: The
neglect of the duration of an episode in determining its value.
-
Empathy gap: The
tendency to underestimate the influence or strength of feelings, in either
oneself or others.
-
End-of-history illusion:
The age-independent belief that one will change less in the future than one has
in the past.
-
Endowment effect: The
tendency for people to demand much more to give up an object than they would be
willing to pay to acquire it.
-
Exaggerated expectation:
The tendency to expect or predict more extreme outcomes than those outcomes
that actually happen
-
Experimenter's or
expectation bias: The tendency for experimenters to believe, certify, and
publish data that agree with their expectations for the outcome of an
experiment, and to disbelieve, discard, or downgrade the corresponding
weightings for data that appear to conflict with those expectations.
-
Forer effect or Barnum
effect: The observation that individuals will give high accuracy ratings to
descriptions of their personality that supposedly are tailored specifically for
them, but are in fact vague and general enough to apply to a wide range of
people. This effect can provide a partial explanation for the widespread
acceptance of some beliefs and practices, such as astrology, fortune telling,
graphology, and some types of personality tests.
-
Form function
attribution bias: In human–robot interaction, the tendency of people to make
systematic errors when interacting with a robot. People may base their
expectations and perceptions of a robot on its appearance (form) and attribute
functions which do not necessarily mirror the true functions of the robot.
-
Framing effect: Drawing
different conclusions from the same information, depending on how that
information is presented.
-
Frequency illusion or
Baader–Meinhof phenomenon: The frequency illusion is that once something
has been noticed then every instance of that thing is noticed, leading to the
belief it has a high frequency of occurrence (a form of selection bias).[46]
The Baader–Meinhof phenomenon is the illusion where something that has recently
come to one's attention suddenly seems to appear with improbable frequency
shortly afterwards.[47] [48] It was named after an incidence of frequency
illusion in which the Baader–Meinhof Group was mentioned.
-
Functional fixedness:
Limits a person to using an object only in the way it is traditionally used.
-
Gambler's fallacy: The
tendency to think that future probabilities are altered by past events, when in
reality they are unchanged. The fallacy arises from an erroneous
conceptualization of the law of large numbers. For example, "I've flipped
heads with this coin five times consecutively, so the chance of tails coming
out on the sixth flip is much greater than heads.
-
Gender bias: A
widely held set of implicit biases that discriminate against a gender. For
example, the assumption that women are less suited to jobs requiring high intellectual
ability. Or the assumption that people or animals are male in the absence of
any indicators of gender. Or the assumption that academia discriminates against
women even as they outnumber men in college and graduate school in the US, and
earn the majority of undergraduate and graduate degrees.
-
Hard–easy effect: The
tendency to overestimate one's ability to accomplish hard tasks, and
underestimate one's ability to accomplish easy tasks.
-
Hindsight bias: Sometimes
called the "I-knew-it-all-along" effect, the tendency to see past
events as being predictable at the time those events happened.
-
Hot-hand fallacy: The
"hot-hand fallacy" (also known as the "hot hand phenomenon"
or "hot hand") is the belief that a person who has experienced
success with a random event has a greater chance of further success in
additional attempts.
-
Hyperbolic discounting:
Discounting is the tendency for people to have a stronger preference for more
immediate payoffs relative to later payoffs. Hyperbolic discounting leads to
choices that are inconsistent over time – people make choices today that their
future selves would prefer not to have made, despite using the same reasoning.
Also known as current moment bias, present-bias, and related to Dynamic
inconsistency. A good example of this: a study showed that when making food
choices for the coming week, 74% of participants chose fruit, whereas when the
food choice was for the current day, 70% chose chocolate.
-
IKEA effect: The
tendency for people to place a disproportionately high value on objects that
they partially assembled themselves, such as furniture from IKEA, regardless of
the quality of the end product.
-
Illicit transference:
Occurs when a term in the distributive (referring to every member of a class)
and collective (referring to the class itself as a whole) sense are treated as
equivalent. The two variants of this fallacy are the fallacy of composition and
the fallacy of division.
-
Illusion of control:
The tendency to overestimate one's degree of influence over other external
events.
-
Illusion of validity:
Overestimating the accuracy of one's judgments, especially when available
information is consistent or inter-correlated.
-
Illusory correlation:
Inaccurately perceiving a relationship between two unrelated events.
-
Illusory truth effect:
A tendency to believe that a statement is true if it is easier to process, or
if it has been stated multiple times, regardless of its actual veracity. These
are specific cases of truthiness.
-
Impact bias: The
tendency to overestimate the length or the intensity of the impact of future
feeling states.
-
Implicit association:
The speed with which people can match words depends on how closely they are
associated.
-
Information bias: The
tendency to seek information even when it cannot affect action.
-
Insensitivity to sample
size: The tendency to under-expect variation in small samples.
-
Interoceptive bias: The
tendency for sensory input about the body itself to affect one's judgement
about external, unrelated circumstances. (As for example, in parole judges who
are more lenient when fed and rested.)
-
Irrational escalation or
Escalation of commitment: The phenomenon where people justify increased
investment in a decision, based on the cumulative prior investment, despite new
evidence suggesting that the decision was probably wrong. Also known as the
sunk cost fallacy.
-
Law of the instrument:
An over-reliance on a familiar tool or methods, ignoring or under-valuing
alternative approaches. "If all you have is a hammer, everything
looks like a nail.
-
Less-is-better effect: The
tendency to prefer a smaller set to a larger set judged separately, but not
jointly.
-
Loss aversion: The
perceived disutility of giving up an object is greater than the utility
associated with acquiring it.
-
Mere exposure effect:
The tendency to express undue liking for things merely because of familiarity
with them.
-
Money illusion: The
tendency to concentrate on the nominal value (face value) of money rather than
its value in terms of purchasing power.
-
Moral credential effect:
Occurs when someone who does something good gives themselves permission to be
less good in the future.
-
Neglect of probability:
The tendency to completely disregard probability when making a decision under
uncertainty.
-
Non-adaptive choice
switching: After experiencing a bad outcome with a decision problem, the
tendency to avoid the choice previously made when faced with the same decision
problem again, even though the choice was optimal. Also known as "once
bitten, twice shy" or "hot stove effect".
-
Normalcy bias: The refusal
to plan for, or react to, a disaster which has never happened before.
-
Observer-expectancy
effect: When a researcher expects a given result and therefore
unconsciously manipulates an experiment or misinterprets data in order to find
it.
-
Omission bias: The
tendency to judge harmful actions (commissions) as worse, or less moral, than
equally harmful inactions (omissions).
-
Optimism bias: The
tendency to be over-optimistic, underestimating greatly the probability of
undesirable outcomes and overestimating favorable and pleasing outcomes (see
also wishful thinking, valence effect, positive outcome bias).
-
Ostrich effect:
Ignoring an obvious (negative) situation
-
Outcome bias: The
tendency to judge a decision by its eventual outcome instead of based on the quality
of the decision at the time it was made.
-
Overconfidence effect:
Excessive confidence in one's own answers to questions. For example, for
certain types of questions, answers that people rate as "99% certain"
turn out to be wrong 40% of the time.
-
Pareidolia: A vague
and random stimulus (often an image or sound) is perceived as significant,
e.g., seeing images of animals or faces in clouds, the man in the moon, and
hearing non-existent hidden messages on records played in reverse.
-
Pessimism bias: The
tendency for some people, especially those suffering from depression, to
overestimate the likelihood of negative things happening to them.
-
Plan continuation bias:
Failure to recognize that the original plan of action is no longer appropriate
for a changing situation or for a situation that is different than anticipated.
-
Planning fallacy: The
tendency to underestimate one's own task-completion times.
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Pluralistic ignorance:
pluralistic ignorance is a situation in which a majority of group members privately
reject a norm, but go along with it because they assume, incorrectly, that most
others accept it. This is also described
as "no one believes, but everyone thinks that everyone believes".
-
Preference falsification:
Preference falsification is the act of communicating a preference that
differs from one's true preference.
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Present bias: The
tendency of people to give stronger weight to payoffs that are closer to the
present time when considering trade-offs between two future moments.
-
Plant blindness: The
tendency to ignore plants in their environment and a failure to recognize and
appreciate the utility of plants to life on earth.
-
Probability matching: Sub-optimal
matching of the probability of choices with the probability of reward in a
stochastic context.
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Pro-innovation bias: The
tendency to have an excessive optimism towards an invention or innovation's
usefulness throughout society, while often failing to identify its limitations
and weaknesses.
-
Projection bias: The
tendency to overestimate how much our future selves share one's current
preferences, thoughts and values, thus leading to sub-optimal choices.
-
Proportionality Bias:
Our innate tendency to assume that big events have big causes, may also explain
our tendency to accept conspiracy theories.
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Pseudocertainty effect:
The tendency to make risk-averse choices if the expected outcome is positive,
but make risk-seeking choices to avoid negative outcomes.
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Recency illusion: The
illusion that a phenomenon one has noticed only recently is itself recent.
Often used to refer to linguistic phenomena; the illusion that a word or
language usage that one has noticed only recently is an innovation when it is,
in fact, long-established.
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Systematic Bias: Judgement
that arises when targets of differentiating judgement become subject to effects
of regression that are not equivalent.
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Restraint bias: The
tendency to overestimate one's ability to show restraint in the face of
temptation.
-
Rhyme as reason effect:
Rhyming statements are perceived as more truthful.
-
Risk compensation /
Peltzman effect: The tendency to take greater risks when perceived safety
increases.
-
Salience bias: The
tendency to focus on items that are more prominent or emotionally striking and
ignore those that are unremarkable, even though this difference is often
irrelevant by objective standards.
-
Scope neglect or scope
insensitivity: The tendency to be insensitive to the size of a problem when
evaluating it. For example, being willing to pay as much to save 2,000 children
or 20,000 children.
-
Selection bias: The
tendency to notice something more when something causes us to be more aware of
it, such as when we buy a car, we tend to notice similar cars more often than
we did before. They are not suddenly more common – we just are noticing them
more. Also called the Observational Selection Bias.
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Selective perception:
The tendency for expectations to affect perception.
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Semmelweis reflex: The
tendency to reject new evidence that contradicts a paradigm.
-
Status quo bias: The
tendency to like things to stay relatively the same (see also loss aversion,
endowment effect, and system justification).
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Stereotyping: Expecting
a member of a group to have certain characteristics without having actual
information about that individual.
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Subadditivity effect:
The tendency to judge the probability of the whole to be less than the
probabilities of the parts.
-
Subjective validation:
Perception that something is true if a subject's belief demands it to be true.
Also assigns perceived connections between coincidences.
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Surrogation: Losing
sight of the strategic construct that a measure is intended to represent, and
subsequently acting as though the measure is the construct of interest.
-
Survivorship bias: Concentrating
on the people or things that "survived" some process and
inadvertently overlooking those that didn't because of their lack of
visibility.
-
System justification:
The tendency to defend and bolster the status quo. Existing social, economic,
and political arrangements tend to be preferred, and alternatives disparaged,
sometimes even at the expense of individual and collective self-interest.
-
Time-saving bias: Underestimations
of the time that could be saved (or lost) when increasing (or decreasing) from
a relatively low speed and overestimations of the time that could be saved (or
lost) when increasing (or decreasing) from a relatively high speed.
-
Parkinson's law of
triviality: The tendency to give disproportionate weight to trivial issues.
Also known as bikeshedding, this bias explains why an organization may avoid
specialized or complex subjects, such as the design of a nuclear reactor, and
instead focus on something easy to grasp or rewarding to the average
participant, such as the design of an adjacent bike shed.
-
Unconscious bias: Also
known as implicit biases, are the underlying attitudes and stereotypes that
people unconsciously attribute to another person or group of people that affect
how they understand and engage with them. Many researchers suggest that
unconscious bias occurs automatically as the brain makes quick judgments based
on past experiences and background.
-
Unit bias: The
standard suggested amount of consumption (e.g., food serving size) is perceived
to be appropriate, and a person would consume it all even if it is too much for
this particular person.
-
Weber–Fechner law: Difficulty
in comparing small differences in large quantities.
-
Well travelled road
effect: Underestimation of the duration taken to traverse oft-travelled
routes and overestimation of the duration taken to traverse less familiar
routes.
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Women are wonderful
effect: A tendency to associate more positive attributes with women than
with men.
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Zero-risk bias: Preference
for reducing a small risk to zero over a greater reduction in a larger risk.
-
Zero-sum bias: A
bias whereby a situation is incorrectly perceived to be like a zero-sum game
(i.e., one person gains at the expense of another).
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